So, Congress finally passed the bailout bill. You know about the Treasury’s newfound $700 billion, and you’ve heard about the snipped golden parachutes, but what does the 451-page week-old shotgun savior of a bill actually mean for you?
Your 401k Should Stop Free Falling
The bill was heralded as a way to calm the markets following the 778-point mini-crash the day after the original bill failed. That plan hasn’t exactly worked. But! If the bill does eventually succeed in stabilizing the markets, everyone with a 401k, IRA, mutual fund, or plain old stocks will directly benefit.
New And Improved FDIC Insurance Limits
The FDIC has upped its insurance limits from $100,000 to $250,000. A couple can now stash half a million dollars in the bank, fully insured by the federal government. The new limits even apply to credit unions.
Technically, the FDIC insurance limits are only extended through 2009 to prevent banks from contributing added billions to the insurance fund that they need in their coffers. Congress will almost definitely make the increase permanent next year, giving banks plenty of time to save up cash to contribute to the reserve fund.
The dreaded AMT—the parallel tax system designed to snag at least a few tax dollars from the wealthiest Americans—will no longer impact almost 20 million Americans. Couples are now exempt up to $69,950 (an extra $3,700!), while singles are exempt up to $44,350 (an $1,850 increase!) The benefit fades out at $150,000 and $112,500, respectively.
A true fix would have involved indexing the AMT for inflation. Maybe next time.
Other Tax Credits
These apply to smaller subsets, possibly you!
- $8 billion in tax breaks for victims of natural disasters;
- $5 billion for college tuition deductions;
- $400 million to help teachers buy their own school supplies;
- $3 billion in deductions for residents who pay state and local taxes in states that don’t have an income tax.
Renewable Tax Credits
The bailout essentially doubles as an energy policy expanding and extending for eight years several energy credits that were set to expire.
- Homeowners can now claim a 30% tax credit for putting solar panels on their roofs without any limit;
- The same 30% credit applies to wind turbines and geothermal heat pumps;
- A one-year extension of breaks for energy efficient home improvements;
- Plus, the first 250,000 buyers of plug-in electric vehicles are eligible for a $7,500 tax credit.
The energy portions of the bill also throw a lot of money at companies looking to invest in clean, renewable energy, but this is about you, not them.
The bill almost failed again in the House because members of both parties wanted to pay for the tax breaks upfront. The Senate, however, only offset the energy portions of the bill. Remember to one day thank your grandkids for the tax breaks.
Health insurers are now required to treat mental health issues the same as they would any physical illness. It also prevents health insurers from making their mental health benefits any more restrictive than other covered illness.
Most importantly, without mental parity, we wouldn’t have a bailout bill at all. The Senate couldn’t introduce a new bailout bill from scratch, so they cut and paste the bailout bill into the relatively uncontroversial mental parity bill. Creative, isn’t it?
This is a housing bill, after all. The heart of the bill is the Troubled Asset Relief Program, or TARP. A team of mortgage specialists—possibly the people who got us into this mess but can now benefit from hindsight—will scoop up questionable mortgages held by banks. Toss out the skunk and the room won’t stink anymore, right? Presumably, the theory goes, this will allow everybody to calm down and get back to business as usual. Banks will once again lend to businesses so they can meet payroll, consumers will be able to borrow money for cars, homes, and school.
Beyond buying up securitized mortgage, the government may also buy whole mortgages on a case-by-case basis. Even if the government doesn’t own your home, the Treasury and other federal agencies have been empowered to modify loans to minimize foreclosures.
Many House members wanted to empower bankruptcy judges to rewrite predatory mortgages altogether, a proposal that was rejected by the Senate.
Homeowners who are able to reduce their mortgages won’t owe tax on the difference, as they normally would. And if you’re a renter living in foreclosed home, you can stay, so long as you stick to the terms of your lease.
If you are at risk of foreclosure, the Department of Housing and Urban Development has several tips for staying out of foreclosure:
- Don’t ignore the problem!
- Immediately call your lender and try to work out a solution.
- Open mail from your lender because it may contain useful information to help avoid foreclosure.
- Start reading up on your rights and foreclosure laws.
- You have options to help avoid foreclosure. Study them.
- Call (800) 569-4287 to find a HUD-approved housing counselor.
- Spend more on your mortgage, less on everything else.
- Sell-off assets that you don’t need, like that spare car or jewelry.
- Don’t pay anyone to help you avoid foreclosure. They are scammers.
- Watch out for anyone promising to save your home if you sign a document. You are signing away your house to scammers.
We’ve written many posts expanding on these topics, including:
4 Things To Try Before Foreclosure
Consumers Are “Unaware” That Lenders Can Help Them Avoid Foreclosure
Lenders Freeze Mortgages Rates For Some
What To Do When Rental Gets Foreclosed?
Mother Saves Family From WaMu Foreclosure With Consumerist’s Executive Contact Info
Halt Foreclosure Proceedings By Challenging Your Bank’s Claim To Your House
New Ruling Means Banks Could Have Tough Time Foreclosing
32 More Foreclosures Dismissed For Lack Of Documentation
Freddie Mac: Don’t Let Fraudsters Steal Your Home
Watch Out For Equity Stripping Scams
How To Save Your Home from Foreclosure
Beware The “Fannie Mae” Prize Draw Scam
HUD also has a new program that can help people transition from predatory mortgages to FHA-insured 30-year fixed mortgages. You qualify if:
- Your troubled home is your primary residence and you don’t own a summer home.
- Your mortgage was born before 2008, and you have made at least six payments.
- You need help paying your existing mortgage.
- As of March 2008, the mortgage costs more than 31% of your gross monthly income.
- You haven’t been convicted of fraud in the past 10 years or lied on your mortgage application.
To read more about the program, visit HUD’s website.
Yes, This Affects You
There’s been a lot written about the bailout and whether it will work. One article in particular from the New York Times captured poignantly the potential price of apathy and inaction:
In 1929, Meyer Mishkin owned a shop in New York that sold silk shirts to workingmen. When the stock market crashed that October, he turned to his son, then a student at City College, and offered a version of this sentiment: It serves those rich scoundrels right.
A year later, as Wall Street’s problems were starting to spill into the broader economy, Mr. Mishkin’s store went out of business. He no longer had enough customers. His son had to go to work to support the family, and Mr. Mishkin never held a steady job again.
Frederic Mishkin — Meyer’s grandson and, until he stepped down a month ago, an ally of Ben Bernanke’s on the Federal Reserve Board — told me this story the other day, and its moral is obvious enough. Many people in Washington fear that the country is starting to spiral into a terrible downturn. And to their horror, they see the public, and many members of Congress, turning into modern-day Meyer Mishkins, more interested in punishing Wall Street than saving the economy.
Let’s hope this thing works.
Lesson From a Crisis: When Trust Vanishes, Worry [The New York Times]
Rescue Sweetened With Tax Incentives [The Washington Post]
Bailout Brings With It Diverse Perks [The New York Times]
Details about the Bailout Plan [Daily Kos]
Tips for Avoiding Foreclosure [HUD]
Hope For Homeowners [HUD]